Weygandt, Kieso, & Kimmel
Prepared by
Kurt M. Hull, MBA CPA
California State University, Los Angeles
John Wiley & Sons, Inc.

STUDY OBJECTIVES
After studying this chapter, you should understand:
Types of receivables
Recognition of
A/R
Valuation of A/R
Disposition of A/R
Maturity & Interest of N/R
Recognition of N/R
Valuation of N/R
Disposition of
N/R
F/S Presentation
& Analysis

STUDY OBJECTIVE 1
Receivables are amounts due from individuals and other companies.
There are three major classes of receivables:
A/R
Owed by customers on account, from credit sales, due in
30-60 days.
N/R
Claims supported by a formal credit instrument.
Due in 60-90 days, with interest.
Other
Loans to company officers, employee advances, refundable income taxes.

STUDY OBJECTIVE 2
A classic general journal sequence for credit sales.
Date Description
July 1 A/R—Polo Company
Sales
(sales on account)
July 5 Sales returns & allowances
A/R—Polo Company
(merchandise returned)
July 11 Cash
Sales Discounts
A/R—Polo Company
(collection of A/R)
Debit
1000
Credit
1000
100
882
18
100
900

STUDY OBJECTIVE 3
•
Receivables are current assets on the balance sheet
•
They are stated at net realizable value, the amount expected to be received in cash.
•
Uncollectible A/R are accounted for using two methods
Direct Write-Off
Method
Allowance
Method

• No entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to bad debts expense.
• Bad debt expense shows only actual losses.
•
Not acceptable for financial reporting purposes unless losses are insignificant.
Bad debts expense
Operating expense on the income statement

General Journal
Date Account Titles Debit Credit
Dec. 12 Bad Debts Expense 200
Accounts Receivable – M.E. Doran 200
Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles.

•
•
•
Uncollectible accounts expense = bad debts expense

ALLOWANCE METHOD
RECORDING ESTIMATED UNCOLLECTIBLES
General Journal
Date Account Titles
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
Debit
12,000
Credit
12,000
Estimated uncollectibles are debited to Bad Debts
Expense and credited to Allowance for Doubtful
Accounts at the end of each period.

ALLOWANCE METHOD
RECORDING A WRITE-OFF
General Journal
Date Account Titles Debit Credit
Mar. 1 Allowance for Doubtful Accounts 500
Accounts Receivable - R. A. Ware 500
Actual uncollectibles are debited to Allowance for
Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

ALLOWANCE METHOD
RECORDING A RECOVERY
To recover an account that has been written off:
1 reverse the write-off entry.
General Journal
Date Account Titles Debit Credit
July 1 Accounts Receivable – R. A. Ware 500
Allowance for Doubtful Accounts 500
2 record the collection in the usual manner.
General Journal
Date Account Titles
July 1 Cash
Accounts Receivable
Debit
500
Credit
500

ALLOWANCE METHOD
BASIS FOR ESTIMATING UNCOLLECTIBLES
Two methods of estimating uncollectible accounts comply with GAAP.
Sales
Percentage of Sales
Matching
Bad Debts
Expense
Emphasis on Income
Statement Relationships
Percentage of Receivables
Cash Realizable Value
Accounts
Receivable
Allowance for
Doubtful
Accounts
Emphasis on Balance
Sheet Relationships
Uses aging schedule

ALLOWANCE METHOD
PERECENTAGE OF SALES BASIS
•
Bad debt expense is based on a % of current credit sales estimated to be uncollectible, based on past experience.
•
Matches expenses with revenues.
•
No consideration given to existing balance in the allowance.
General Journal
Date Account Titles
Dec. 1 Bad Debts Expense
Allowance for Doubtful Accounts
Debit
8,000
Credit
8,000
If net credit sales for the year are $800,000, the estimated bad debts expense is $8,000 (1% X $800,000).

ALLOWANCE METHOD
PERECENTAGE OF RECEIVABLES BASIS
•
Bad debt expense based on % of the ending balance in A/R.
• The adjusting entry is the difference between the required balance and the existing balance in the allowance account.
• Estimates NRV of receivables.
General Journal
Date Account Titles Debit
Dec. 1 Bad Debts Expense 1,700
Credit
Allowance for Doubtful Accounts 1,700
If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $,1,700 ($2,228 - $528) is necessary.

Which of the following approaches for bad debts is referred to as a balance sheet method?
A. Percentage of receivables method
B. Direct write-off method
C. Percentage of sales method
D. Both a and b
Answer: (A) Percentage of receivables method .

STUDY OBJECTIVE 4
Two ways to dispose of A/R
Factoring
Credit card sales

DISPOSING OF A/R
FACTORING (SALE) OF RECEIVABLES
A factor is a finance company that buys A/R from companies, then collects payments directly from the customers.
Date
General Journal
Account Titles
Cash
Debit
588,000
Service Charge Expense (2% x $600,000) 12,000
Accounts Receivable
Credit
600,000
Henderson Furniture factors $600,000 of receivables to Federal
Factors, Inc. Federal Factors assesses a 2% service charge.

CREDIT CARD SALES
Three parties are involved with credit card sales:
Credit card issuer Retailer Customer
The retailer pays the credit card issuer a fee of 2-6% of the invoice price.
Sales from Visa, MasterCard, and Discover are treated differently than American Express & Diners Club

VISA, MASTERCARD, & DISCOVER
Date
•
Considered cash sales by the retailer.
•
Upon receipt of credit card sales slips from a retailer, the bank adds the amount to the seller’s bank balance.
General Journal
Account Titles
Cash
Service Charge Expense
Sales
Debit
970
30
Credit
1,000
Barbara Hardy purchases CD’s for her restaurant from Ty Parker Music Co. for
$1,000 using her VISA First Bank Card.
First Bank charges a 3% fee.

AMERICAN EXPRESS & DINERS CLUB
Date
• Considered credit sales by the retailer.
• Conversion into cash does not occur until the companies remits the net amount to the seller.
General Journal
Account Titles
Accounts Receivable
– American Express
Service Charge Expense
Sales
Debit
285
15
Credit
300
Four Seasons for her restaurant from Karen Kerr Music Co. for
$1,000 using her VISA First
Bank Card. The service fee that
First Bank charges is 3%.

•
A promissory note is a written promise to pay a specified amount of money on demand or at a definite time.
•
The party making the promise is the maker.
• The party to receive payment is the payee.

STUDY OBJECTIVE 5
• When the life of the note is expressed in terms of days , you need to count the days.
• In counting, the date of issue is omitted but the due date is included .
•
Example: The maturity date of a 60-day note dated July 17 is:
Term of note
July (31-17)
August
Maturity date:
60 days
-14 days
-31days
September 15

The formula for computing interest on an interest-bearing note is:
Face Value of Note
X
Annual
Interest
Rate
X
Time in Terms of
One Year
= Interest
The interest rate specified on the note is an annual rate of interest.

Terms of Note
$ 730, 18%, 120 days
$1,000, 15%, 6 months
$2,000, 12%, 1 year
Interest Computation
Face X Rate X Time = Interest
$ 730 X 18% X 120/360 = $ 43.80
$1,000 X 15% X 6/12 = $ 75.00
$2,000 X 12% X 1/1 = $240.00
The interest rate specified is the annual rate.

Compute the missing amount below:
Face Value
?
Annual Interest Rate
9%
Time
120 days
Total Interest
$450
(face value = principal)
$450 = P x .09 x 120/360
P = $15,000

STUDY OBJECTIVE 6
Notes receivable are recorded at FACE VALUE
General Journal
Date Account Titles Debit Credit
May 1 Notes Receivable 1,000
Accounts Receivable – Brent Company 1,000
Wilma Company receives a $1,000, 2-month, 12% promissory note from Brent Company to settle an open account.

STUDY OBJECTIVE 7
•
N/R are recorded at face value.
•
Allowance for Doubtful Accounts used to record estimated uncollectible accounts.
•
N/R reported on the balance sheet at net realizable value.
Gross N/R – Allowance = Net Realizable Value

STUDY OBJECTIVE 8
HONORED NOTE
A note is honored when it is paid in full at its maturity date.
For an interest-bearing note, the maturity amount is the face value plus interest.
Date
Nov 1
Account Titles
Cash
Notes Receivable
Interest Revenue
(collection of Higley, Inc. note)
Debit
10,375
Credit
10,000
375
Betty Co. lends Higley Inc. $10,000 on June 1, accepting a 5-month, 9% interest-bearing note.
Betty collects the maturity value of the note from Higley on Nov 1.

Date Account Titles
Sept 30 Interest Receivable ($10,000 x 9% x 4/12)
Interest Revenue
(accrue 4 month’s interest on Higley,
Inc. note)
Debit
300
Credit
300
If Betty Co. prepares prepares financial statements on
September 30, interest for 4 months, would be accrued.
Interest receivable is a current asset

Date
Nov 1
Account Titles
Cash
Notes Receivable
Interest Receivable
Interest Revenue
(collection of note at maturity)
Debit
10,375
Credit
10,000
300
75
When interest has been accrued, it is necessary to credit Interest Receivable at maturity.

Date
Nov 1
Account Titles
A/R—Higley, Inc.
Notes Receivable
Interest Revenue
(record dishonor of Higley note)
Debit
10,375
Credit
10,000
375
A dishonored note is a note that is not paid in full at maturity. Since the payee still has a claim against the maker of the note, the balance in
Notes Receivable is usually transferred to Accounts Receivable.
NOTE:
This scenario assumes the note will eventually be collected.

Date
Nov 1
Account Titles
Allowance for doubtful accounts
Notes Receivable
(record dishonor of Higley note)
Debit
10,000
If there is no hope of collection,
The face value eliminated, and the allowance is debited.
Also, no interest would be accrued.
Credit
10,000

STUDY OBJECTIVE 9
FINANCIAL STATEMENT
PRESENTATION & ANALYSIS
•
In the balance sheet, short-term receivables are reported in the current assets section below short-term investments.
•
Report both the gross amount of receivables and the allowance for doubtful accounts.
Accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, net
$1,200,000
(48,000)
$1,152,000

A/R TURNOVER RATIO
•
Financial ratios are computed to evaluate the liquidity of a company’s accounts receivable.
•
The accounts receivables turnover ratio is used to assess the liquidity of the receivables.
•
The data below is from Cisco Systems:
Net Credit
Sales
/
Average
Net Receivables =
$18,878 / ( $1,105 + $1,351)/2 =
Accounts
Receivable
Turnover
15.4 times

AVERAGE COLLECTION PERIOD
•
The average collection period in days is a variant of the turnover ratio that makes liquidity even more evident.
• This is done by dividing the turnover ratio into 365 days.
•
The general rule is that the collection period should not exceed the credit term period.
• Cisco System’s turnover ratio is computed as:
Days in year
/
A/R Turn
Ratio
=
Average
Collection
Period
365 / 15.4 23.7 days

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